Multi State, Multi location Entity under GST : Common Costs to be allocated, Inter branch supply to be billed at transfer price - section 25 , sec 35

DISTINCT PERSONS

1.Under GST a  concept of distinct person is added.

2.According to this concept if a person has obtained or is required to obtain more than one registration, whether  in  one  state  or  union  territory  or  more  than  one  state  or  union  territory  shall,  in  respect  of each such registration, be treated as distinct persons for the purposes of this Act or

3.Where a person who has obtained or is required to obtained registration in a state or union territory in respect  of  an  establishment  has  an  establishment  in  another  state  or  union  territory,then  such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

4.As per Section 25(2) of the GST Act every person shall obtain one registration per State. Proviso to section  25(2)  provides  that  a  person  having multiple  business   verticals  may  obtain  separate registration for each business vertical in the State.

5.Therefore  under  GST  same  establishment  or  offices  or  branches  or  godown  which  are  situated outside  the  state  are  treated as distinct  person and inter-state  supply also chargeable  under GST i.e. IGST is payable here.

6.Therefore,  when  two  units  of  the  same  business  have  taken  different  registration,  then  they  will  be considered as a distinct entity/ person as per the GST law. The laws relating to filing of returns and other compliance procedures shall apply to both of them separately.

7.Hence, Distinct persons can be :-·An establishment in India and an establishment outside India·An establishment in one state or a union territory and an establishment in another state or union territory8.For  example,  if  A  (in  Bangalore)  has  branches  in  Germany  and  Maharashtra,  the  branches  in Maharashtra  and  Germany  will  both  be  distinct  persons/  entities.  If  A  has  another  component  B which  is  different  from  A  and  has  obtained  a  different  GST  registration,  A  and  B  will  be  distinct entities.9.The supply stated above is covered under Schedule I of the GST Act and as per this schedule, when a supply  is  made  between  distinct  persons  during  the  course  of  business,  it  is  considered  as  a  supply even  when  there  is  no  consideration.  Therefore  these  transactions  are  considered  as  taxable  supply.Example-stock  transfers  made  between  distinct  units,  even  if  without  a  consideration  will  be  a taxable supply.10.Another example is suppose a person have an branch office in Delhi and head office in Jaipur, some employees of Delhi join personality grooming services or training services given by the  head office in  Jaipur than  as  per  distinct  person  both  offices  are  separate  under  GST  and  therefore  GST  is payable  here  as  per  schedule  I,  but  as  per  section  12(4)  place  of  supply  is  Jaipur  head  office  and CGST  and  SGST  is  charged  by  Jaipur  office  under  this  case  and  no  credit  is  available  to  Delhi branch of such CGST in this case.11.Therefore under the above discussion it is clear to us what is the meaning of distinct persons is and as we  know  already  that  under  only  IGST  will  be  set-off  from  CGST  and  SGST  but  CGST  credit  of one distinct person cannot be utilized by the other distinct person for paying CGST liability.

Inter branch supply to be billed at transfer price 

One of the issues in having SGST and CGST structure within GST and which is likely to continue in India is tax on inter-branch supply

For companies with a presence in multiple states, the Karnataka Appellate Authority for Advance Rulings has upheld the levy of goods and services tax on services rendered by one office branch to other centres. 

In-house service functions such as human resources and payrolls, if carried out from a centre in one state for offices in other states, will attract GST for which it will have to issue an invoice. 

A large business based in New Delhi with centralised finance, IT and HR unctions for branches across states would be deemed to be providing support services to the other locations and would need to raise invoices charging GST. 

The decision has wide ramifications for companies with offices in many states, adding to their transaction costs and compliance burden even though the tax paid can be adjusted against their final GST liability. 

However, adjusting the tax paid on in-house transfers is not an option for companies that deal in goods or services that are exempt from GST. These include sectors such as healthcare and education, which are exempt from GST, and petroleum and liquor, which are out of the ambit of the tax.

The Authority for Advance Rulings had in response to an application by Bengaluru-based Columbia Asia Hospitals held that the employer-employee relationship in the corporate office exists only there and not with other office units even if they are part of the same legal entity, as far as the GST law is concerned. 

The company then approached the appellate body against the ruling, saying that the Authority for Advance Rulings had erred in holding that activities carried out at the India Management Office in relation to employment such as accounting, other administrative and IT systems maintenance, which indirectly benefit units located in the other states, was between distinct persons as per Section 25 (4) of the act and shall be treated as supply as per entry 2 of Schedule I of the act. 

“The Appellant has placed reliance on a few CESTAT (Central Excise and Service Tax Appellate Tribunal) decisions to buttress their case. We have gone through all case laws relied upon and hold that the said decisions will not be applicable to the matter at hand since they were rendered in the context of the Service Tax law,” the Appellate Authority said. 

Although these rulings are case specific, they have a persuasive impact on tax assessment of other companies under similar circumstances. Tax experts said the salary of employees should not to be added as the employment contract is specifically kept outside the ambit of GST. 
“This ruling, however, clearly states that employee cost also has to be added as well, though it indicates that strategic, control, coordination and policy related work done from head office may not qualify as a ‘service,’” said Pratik Jain, national indirect tax leader at PwC. 

Companies will need to undertake a proper transfer pricing study to comply. “The GST council needs to examine this issue in detail and either come up with a clarification or amendment in law so that this concept does not cause undue hardship for the industry,” Jain added. 

Multi-Locational Entities: 

a) According to Section 35 of CGST Act, every registered person is required to maintain books of accounts, records and other documents. However, problem may arise when the principal place of business holds or maintains all the books and records because it will be very difficult to find specific transactions and file those in returns or statements. For example: Physically Goods transferred from Maharashtra to Gujrat but the same has not been recorded in books of accounts. In this case, it has to find out from other sources like Delivery challan, E-way bill or any other documents maintained. 

b) Where common costs are incurred by the one unit of multi-locational entity in respect of all units, required to be allocated between the units based on the turnover of each distinct person, or based on manpower deployed, or any other suitable cost-driver. However if any special cost is incurred by the unit then it should be allocated to that unit only. For example: GSTIN-wise allocation of staff cost, Cost incurred commonly at or by the Head Office, such as Marketing and Brand Building Costs.

 c) Many enterprises use infrastructure facility available in a centralized location, back-office or support office either in respect of Information Technology, Finance, Accounting, Human Resource or Personnel, Corporate Management, etc. These costs are required to be allocated based on ‘end use’ instead off on the basis of turnover. Such allocation should also be a subject matter of valuation under the GST law. For example: Head Office could be providing support to branches, such as Centralized Accounting Services; HR Services etc.